Italy’s Yield Spread to Bunds to Narrow Further, Carmignac Says

Sept. 1 (Bloomberg) -- Italian and Spanish 10-year
government bond yield spreads over benchmark German bunds will
narrow further toward 100 basis points before valuations become
stretched, according to Carmignac Gestion SA.

Yields on Italy and Spain’s 10-year securities dropped to
records last week after European Central Bank President Mario
Draghi said on Aug. 22 that officials are “ready to adjust our
policy stance further,” fueling speculation they may embark on
a strategy of asset purchases to boost the economy. The central
bank’s Governing Council is set to meet in Frankfurt on Sept. 4.

“From a spread perspective, Spanish and Italian bonds in
particular, and some small positions in Portugal and Greece,
remain compelling,” Jean Medecin, who helps oversee the
equivalent of about $66 billion as a member of the investment
committee at Carmignac Gestion SA in London, said in an
interview today. “The ECB will try to comfort investors that
it’s really committed to anchoring inflation expectations.”

Italy’s 10-year yield fell one basis point, or 0.01
percentage point, to 2.42 percent as of 5 p.m. London time. The
3.75 percent bond due in September 2024 rose 0.13, or 1.30 euros
per 1,000-euro face amount, to 111.855.

Spread Narrows

The extra yield investors demand to hold Italian 10-year
debt over German bunds was little changed at 154 basis points.
The spread narrowed to 132 basis points on June 9, the least
since April 2011. That’s down from as much as 575 basis points
in November 2011. The yield difference between Spanish and
German 10-year securities widened three basis points to 137
basis points.

Longer-dated Spanish securities fell as the Madrid-based
Treasury said it sold 1 billion euros in 50-year bonds for the
first time in a private placement via banks today.

Spain’s Treasury sold the 4 percent bonds maturing in
October 2064, it said in a statement. Banco Bilbao Vizcaya
Argentaria SA and CaixaBank SA organized the deal. Spain has
covered 78.4 percent of its medium to longer-term funding
program with this sale.

The nation plans to auction as much as 3 billion euros in
bonds due in October 2024 and October 2044 on Sept. 4, the
Treasury said today.

Five economists forecast ECB policy makers will cut the
refinancing rate by 10 basis points to a record 0.05 percent on
Thursday, while the remaining 50 predict no change, according to
Bloomberg surveys.

Quantitative Easing

“Expectations are very high on Draghi announcing measures
or giving some hints about quantitative easing,” said Daniel
Lenz, lead market strategist for the euro area at DZ Bank AG in
Frankfurt. “Bonds are benefiting from this, especially
peripheral bonds given the carry they offer,” he said,
referring to the strategy of selling assets with lower yields
and investing in those paying higher returns.

Yields on German one-, two- and three-year securities were
below zero, meaning investors holding the debt until it matures
will receive less back than they paid to buy it. Germany’s
benchmark 10-year bund yield was little changed at 0.88 percent.
France’s two-year rate dropped below zero for the first time,
touching minus 0.002 percent.

The average yield to maturity on euro-area government
securities dropped to a record-low 1.045 percent on Aug. 27,
according to Bank of America Merrill Lynch Indexes.

The rate has tumbled from 2.06 percent at the start of this
year as concern about low inflation in the region prompted ECB
policy makers to lower interest rates and pledge an
unprecedented round of stimulus measures in June.

Euro-area government securities returned 10 percent this
year through Aug. 29, Bloomberg World Bond Indexes show. Spain’s
have earned 13 percent, with Italy’s gaining 12 percent and
Germany’s 7.4 percent.

Volatility on Finnish bonds was the highest in the euro
area today, followed by those of Germany and Belgium, according
to measures of 10-year debt, the yield spread between two- and
10-year securities and credit-default swaps.